Nationalizing in Order

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"Nationalizing in Order"

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The biggest problem with any effort to take large banks into some form of receivership is that you don’t want to spark a run in the equity on all banks. In other words, while it’s fine if the stock market doesn’t like the idea of nationalizing banks, it’s not fine if the stock market goes into a total panic over it. Such a panic would only increase the number of banks that need to be nationalized and increase the cost to the taxpayer.

Under the circumstances, the thing to do is to be strategic about the order in which you do the “stress tests.” You want to first examine the banks that are in the best shape. Then the government can find that they’re solvent, probably offer some form of guarantee, pat everyone on the head, and create a situation where those banks have an easier time raising private capital. Only after you’ve done that do you go to the banks that people think are insolvent and, if that turns out to be right, you do the nationalization there. There’s reason to think that the markets are already pricing a chance of nationalization into the values of Citi’s trust preferred securities. So it’s not exactly a secret which banks are the most troubled, and which the least.

This is also related to this Josh Marshall post:

At a senior leadership meeting yesterday, Bank of America CEO Ken Lewis told bank leaders (according to a source in the room) that government officials have assured him that nationalization “isn’t on the table.”

He said “he has [also] urged the government to say this publicly.”

If I were Tim Geithner, I would keep offering these reassurances to executives at large banks right up until the minute I nationalized the first one. Then I would scramble to hit the others. And then in the time it takes the cable networks to round up some talking heads to discuss the situation, it should all be done. The banks have either been certified as sound or taken into receivership. You want a fait accompli, not a lot of talk. But you do need to move swiftly. Irrespective of what the administration says, it’s already “out there” and taking its toll. At this point there’s a need for fairly swift and decisive action.

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